The Goods and Services Tax (GST) in India has revolutionized the way businesses operate, particularly in terms of tax credits. One of the key components of this system is the Input Service Distributor (ISD). In this short article, we aim to provide a comprehensive understanding of what an Input Service Distributor is, its role under GST, and practical examples of its operation.
Defining Input Service Distributor under GST
An Input Service Distributor is essentially an office of a business that receives tax invoices for services used by its branches. The ISD then distributes the credit of CGST, SGST, IGST, and UTGST, as applicable, to the respective branches on a proportional basis. The ISD then distributes the credit of CGST, SGST, UTGST, or IGST paid on these services to a supplier of taxable goods or services having the same PAN as the ISD.
NOTE : The ISD mechanism is specific to the distribution of Credit on common invoices about Input Services only and NOT goods.
Here are some important facts about ISD under GST:
Registration: An ISD must register as such, in addition to its normal taxpayer registration under GST. This declaration is made under serial number 14 of the REG-01 form.
Invoicing: The ISD can distribute the tax credit to recipients by issuing an ISD invoice.
Returns: The amount of tax credit distributed should not exceed the available tax credit with the ISD at the end of a relevant month. This is to be filed in GSTR-6 by the 13th of the succeeding month. The ISD can obtain the information of the Input Tax Credit (ITC) from the GSTR-2B return.
Recipient’s Role: The recipient of the ITC can view the distributed Input Tax Credit in GSTR-6A, which is auto-populated from the supplier’s return. The recipient branch can then claim this by declaring it in GSTR-3B. An ISD is not required to file annual returns in form GSTR-9.
Restriction in Distribution: The credit of tax paid under the reverse charge mechanism is not available for distribution to the recipients. Therefore, the ISD must utilize such credit only as a normal taxpayer.
Input Service Distributor under GST | Role in Business
Let me draw a simple analogy between an Input Service Distributor (ISD) and ‘Bade Bhaiyya’ or an elder sibling in your family. Now, the elder sibling gets the monthly allowance from the parents who then distribute this allowance among the younger siblings. Along similar lines, ISD under GST is the taxpayer who receives the invoices for the services (not goods) used by its branches
The Input Service Distributor then fairly distributes the tax paid, known as the Input Tax Credit under GST, to these branches on a proportional basis by issuing ISD invoices. The branches can have different identities (GSTINs) but must belong to the same family (PAN) as that of ISD.
Let’s understand ISD’s role with a simple example :
Imagine ‘Gada Electronics’, a well-known electronics store in Ahmedabad, owned by our very own Jethalal. Gada Electronics has branches in Pune and Gurgaon. One day, Jethalal decides to upgrade the ERP system of all his branches and incurs an annual maintenance expense.
Now, since the ERP is used by all his branches, the GST Input Tax Credit of the entire service cannot be claimed in Ahmedabad alone. So, the head office at Ahmedabad, acting as the responsible elder sibling of the ISD, distributes the Input Tax Credit to the other two locations (Pune & Gurgaon).
To illustrate further, consider that the cost of the annual maintenance was INR 1,00,000 plus 18% GST invoice received at the Ahmedabad head office. The head office, acting as the ISD, can distribute the GST paid on these services to all branches based on their turnover ratio. If the turnovers of the Ahmedabad, Pune & Gurgaon branches are in the ratio of 4:5:1, the GST of INR 18,000 will be distributed accordingly.
So, in a nutshell, ISD plays a crucial role in ensuring a fair distribution of GST Input Tax Credit across all branches of a business.Union Budget 2024 & Distribution of Credit by ISD
In the Interim Union Budget 2024 announcement, the Finance Minister, Smt.Nirmala Sitharaman, proposed the manner of distribution of credit by input service distributors. A substitution has been proposed to Section 20 of the CGST Act,2017, which addresses the ‘Manner of distribution of credit by Input Service Distributor.’ The revised wording of the section mandates any office of the supplier of goods or services or both, receiving tax invoices towards the receipt of input services, to be registered as an Input Service Distributor under clause (viii) of section 24.
The Input Service Distributor shall now distribute the OTC under GST of CGST or IGST charged on invoices received by him. This includes the credit of Central GST or Integrated GST in respect of services subject to levy of tax under sub-section (3) or sub-section (4) of section 9, paid by a distinct person registered in the same State as the said Input Service Distributor.
Section 39 of CGST Act, 2017
Section 39 of the CGST Act is crucial in understanding the process of furnishing returns under the CGST Act.
Section 39(1) of the CGST Act states that every registered person, excluding an Input Service Distributor, a non-resident taxable person, or a person paying tax under sections 10, 51, or 52, must furnish a return for every calendar month or part thereof. This return, submitted electronically, includes details of inward and outward supplies under GST of goods or services or both, Input Tax Credit availed, tax payable, tax paid, and other prescribed particulars.
The Input Tax Credit distribution by the Input Service Distributor (ISD) must not exceed the available ITC with the ISD by the month’s end. GSTR-6 is to be filed by the ISD no later than the 13th of the succeeding month.
How ISDs distribute the Credit under GST?
There are two possible cases of Credit distribution in ISD’s scenario :
Case 1 : ISD and Recipient in the same state
Credit of | Distributed as |
|---|---|
CGST | CGST |
SGST | SGST |
IGST | CGST or SGST |
Case 2 : ISD and Recipient in the different state
Credit of | Distributed as |
|---|---|
CGST | CGST or IGST |
SGST | SGST or IGST |
IGST | IGST or CGST |
Conditions for Credit distribution by ISD under GST
According to Section 20(2) of the Central Goods and Services Tax (CGST) Act of 2017, there are specific conditions under which an Input Service Distributor (ISD) can distribute credit. These conditions include :
- The ISD can allocate credit to the credit recipients based on a document that includes prescribed details.
- The total credit distributed must not surpass the total available credit.
- The credit from the tax paid on input services that are attributable to a specific credit recipient can only be allocated to that particular recipient.
In a nutshell….
The role of an Input Service Distributor (ISD) under GST is pivotal in ensuring a seamless flow of credit across different units of a business. By distributing the GST Input Tax Credit proportionately among its branches, an ISD simplifies the credit-taking process and enhances operational efficiency. As businesses continue to navigate the complexities of the GST regime, the ISD mechanism proves the GST regime’s adaptability and its commitment to facilitating a smooth transition for all stakeholders.